Collateral Reuse and Balance Sheet Space
IMF Working Papers, May 8, 2017
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- Collateral Reuse and Balance Sheet Space
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Bibliographic details
- Authors: Manmohan Singh
- Published: May 8, 2017
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781475599343.001
Summary
- Transactions on wholesale capital markets are often secured by marketable collateral.
- Collateral needs balance sheet space to move within the financial system.
- Certain new regulations that constrain private sector bank balance sheets may have the effect of impeding collateral flows.
- Impeded collateral flows may have important consequences for monetary policy transmission, for short term money market functioning, and for market liquidity.
- This paper analyzes securities-lending, derivatives, and prime-brokerage markets as suppliers of collateral, in contrast to literature focused mainly on the repo market.
- The paper highlights the incentives created by new regulations for different suppliers of collateral.
- The paper argues that central banks should be mindful of the effect of their actions on the ability of markets to intermediate collateral.
Analysis and scope
- Focus on collateral reuse across market segments beyond the repo market: securities-lending, derivatives, and prime brokerage.
- Emphasis on interactions between private sector bank balance sheet constraints and collateral movements.
- Attention to implications for monetary policy transmission, short term money market functioning, and market liquidity.
- Consideration of incentives created by new regulations for different collateral suppliers.
Key findings and themes
- Marketable collateral requires balance sheet space to be transferred and reused within the financial system.
- New regulations that constrain bank balance sheets can impede collateral flows.
- Impeded collateral flows can affect:
- Monetary policy transmission
- Short term money market functioning
- Market liquidity
- Suppliers of collateral studied include:
- Securities-lending markets
- Derivatives markets (OTC derivatives, OTC derivatives market)
- Prime-brokerage markets
- The paper contrasts these suppliers with the traditional focus on the repo market.
Policy recommendations and implications
- Central banks should be mindful of the effect of their actions on the ability of markets to intermediate collateral.
- Regulatory design should consider incentives for different suppliers of collateral created by balance sheet constraints.
Content in this bundle
- Collateral Reuse and Balance Sheet Space , WP/17/113, May 2017